Eherenstorfer v. Division of Public Welfare, Dept. of Human Services of State of N.J.

• Decision Date: 12 October 1984
• Citation: 483 A.2d 212,196 N.J.Super. 405
• Parties: Sieglinde EHERENSTORFER, Petitioner-Appellant, v. DIVISION OF PUBLIC WELFARE, DEPARTMENT OF HUMAN SERVICES of the STATE of NEW JERSEY and Bergen County Welfare Board, Respondents-Respondents.
• Court: New Jersey Superior Court — Appellate Division

Page 405

196 N.J.Super. 405

483 A.2d 212

Sieglinde EHERENSTORFER, Petitioner-Appellant, v. DIVISION OF PUBLIC WELFARE, DEPARTMENT OF HUMAN SERVICES of the STATE of NEW JERSEY and Bergen County Welfare Board, Respondents-Respondents.

Superior Court of New Jersey Appellate Division.

Argued Sept. 18, 1984.

Decided Oct. 12, 1984.

Richard S. Semel, Hackensack, for petitioner-appellant (Bergen County Legal Services, attorneys).

Dennis J. Conklin, Deputy Atty. Gen., for respondent-respondent Div. of Public Welfare, Dept. of Human Services (Irwin I. Kimmelman, Atty. Gen., James J. Ciancia, Asst. Atty. Gen., of counsel).

No brief was filed on behalf of respondent-respondent Bergen County Welfare Bd.

Before Judges MICHELS and PETRELLA.

The opinion of the court was delivered by

PETRELLA, J.A.D.

After this court voided certain regulations of the Division of Public Welfare in the unreported decision of Melendez v. New Jersey Department of Human Services, A-628-81, decided November 12, 1982, the petitioner Sieglinde Eherenstorfer sought to have her eligibility recalculated. When the agency refused to do so, a fair hearing was conducted before an Administrative Law Judge (ALJ) who concluded that petitioner was entitled to a recalculation. Although the Acting Director of the Division of Public Welfare in her final decision adopted the ALJ's determination, recalculation was denied for any period of assistance preceding the date of petitioner's request for a fair hearing. Petitioner appeals contending that she was entitled to have her eligibility recalculated from the payment period immediately after this court's decision. We agree and reverse and remand.

The facts are not complicated. On June 13, 1983, after becoming aware of the Melendez case (which had not been submitted for publication) Eherenstorfer wrote to the Bergen County Welfare Board (County Board) requesting that it recalculate her income and adjust her assistance payments from the Aid to Families with Dependent Children (AFDC) program. Relying on our decision in Melendez, she challenged the manner in which the County Board calculated and treated her income from the rental of rooms in her home as unearned income.

Petitioner's request for recalculation was denied on the basis that her income had been determined in accordance with the prevailing regulations, N.J.A.C. 10:82-4.10 and -4.12, notwithstanding the fact they were the very regulations previously invalidated by this court in Melendez. Petitioner requested a fair hearing on June 21, 1983.

A hearing was conducted by an ALJ on August 9, 1983 to determine the correctness of the action of the County Board in budgeting rental income from real property as unearned income. There was no testimony taken and only legal arguments were presented. The ALJ concluded in an August 24, 1983 initial decision that "the agency action in budgeting the petitioner's rental income as unearned income, without the modifications required by the holding in Melendez, was incorrect." He pointed out that in Melendez N.J.A.C. 10:82-4.10 and 10:82-4.12(a)(1) were considered violative of the federal statutes and regulations insofar as the New Jersey provisions treated rental income as unearned income and set the monthly cost figure for the operation and maintenance of a rental unit. The ALJ ordered that the petitioner's assistance budget be recomputed so as to comply with the standards set forth in Melendez.

The County Board filed an exception ¹ to the ALJ's initial decision and argued that it could not comply because the regulations which were found void in Melendez were still in effect and that its actions were governed by these regulations and the directives of the Division of Public Welfare (Division).

The Acting Director of the Division concluded in her September 26, 1983 final decision that Melendez, although in her view not dispositive, was persuasive and that steps were being taken ² to amend the regulations to conform with the holding in Melendez. Accordingly, she directed the County Board "to recompute the amount of grant entitlement to which the eligible unit is entitled.... Entitlement to a corrective payment will be retroactive to July 1, 1983, the payment period following the filing of the request for a fair hearing." In response to the petitioner's objection to this directive and the argument that recalculation should be made to the date of the Melendez decision, or at the very latest the date that petitioner requested her grant be recalculated, the Acting Director said in an October 19, 1983 letter that she did not find the holding in Melendez "dispositive of the matter at issue." This appeal followed.

Even if the Acting Director disagreed with Melendez, that decision was dispositive of the validity of the regulation challenged therein. Because the Acting Director nevertheless found Melendez "persuasive," we cannot be sure of the extent of the disagreement. However, that does not alter the binding effect of Melendez. In Melendez the petitioner resided with her two minor children in one apartment of a four-family house owned by her. At the time the maximum grant for a family of three was $360 per month. There the Passaic County Board of Social Services notified petitioner she would initially receive $45 for the month of January 1981 and $15 per month thereafter.

In Melendez we held that New Jersey's practice of treating all rental income as unearned income, reduced only by the standardized deductions, impermissibly controvenes federal statutes and regulations. We remanded to determine whether Melendez's claimed expenses were "reasonably attributable to the earning of property income." Melendez dealt with the manner in which rental income received by AFDC recipients was classified when determining the available monthly resources of an eligible unit. Our determination that rental income shall be treated as earned income rather than unearned income was important because the manner in which such income is classified can substantially affect the determination of an eligible unit's needs. Prior to Melendez, N.J.A.C. 10:82-4.10 and 4.12 had treated all rental income as unearned income with recipients given a standardized deduction designed to offset the cost of maintenance and operation of the rental unit. Claims for expenses in excess of those deductions were not allowed. We said in deciding Melendez:

The issue in contention before the Administrative Law Judge was the validity of N.J.A.C. 10:82-4.10 which provides that rental income is unearned income and N.J.A.C. 10:82-4.12(a)(1) which sets the monthly cost figure for the operation and maintenance of a rental unit at $29 per month per rented room when heat is provided. Petitioner claims that this latter regulation is patently unfair in view of her mortgage payments of $521 per month as well as other expenses. The Administrative Law Judge found these regulations to be violative of the following federal statute and regulations: 42 U.S.C. 602(a)(7), which required that the state must take into consideration "any expenses reasonably attributable to the earning of ... income ...," and 45 C.F.R. 233.20(A)(6)(iii) through (viii). It was specifically provided in 45 C.F.R. 233.20(A)(6)(vii):

With regard to the degree of activity, earned income is income produced as a result of the performance of services by a recipient; in other words, income which the individual earns by his own efforts, including managerial responsibilities, would be properly classified as earned income, such as management of capital investment in real estate. Conversely, for example, in the instance of capital investment wherein the individual carries no specific responsibility, such as where rental properties are in the hands of rental agencies and the check is forwarded to the recipient, the income would not be classified as earned income.

The Administrative Law Judge reversed the action of the County Board. The Director of the N.J. Division of Public Welfare in turn rejected the conclusion of the Administrative Law Judge and found that the AFDC payment was correctly determined by the County Board. This is an appeal from the Director's determination. We reverse and remand.

The principal thrust of the argument in the brief submitted on behalf of respondents is that income generated from an investment in property, "... in connection with which few significant managerial functions were performed by its owner..." should be treated as unearned income for the purpose of computing AFDC benefits. Respondents concede that the State's regulation "... may perhaps be overbroad in treating all rental income ... as unearned income absent consideration of the individual recipient's 'degree of activity' in the management of the rental property." Significantly, however, respondents have been unable to show us any federal statute or regulation which authorizes a concept such as degree of activity to be considered with respect to AFDC entitlements. In fact, 45 C.F.R. 20(A)(6)(vii) quoted above impliedly, if not expressly, rejected such a concept. With regard to food stamps, moreover, a federal regulation has been adopted which requires that an average of 20 hours per week must be devoted to property management before it can be considered as earned income. FSM § 511.2(a) Respondents might better be addressing to responsible federal authorities their suggestion that such a regulation be extended to AFDC. In any event, it is well established that states may not contravene valid federal requirements. Arizona St. Dep't of Pub. W. v. Department of Health, E & W, 449 F.2d 456, 470 (9th Cir.1971), cert. den., 405 U.S. 919 (1972), 30 L.Ed.2d 789, 92 S.Ct. 945. Finally, we note that if the property management efforts of petitioner were as inconsequential as respondents believe them to have been, they would result in only corresponding inconsequential amounts being deducted from total gross income to determine AFDC...